Tough times for dairy farmers

Agribusiness Bulletin

This Agribusiness Bulletin takes a closer look at milk prices and the potential impact on Tasmania’s dairy industry. It includes an overview of some of the financial assistance packages offered by milk processors.

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The Agribusiness Bulletin

The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise. To get more articles like this delivered straight to your inbox subscribe to the Agribusiness Bulletin.

Agribusiness Bulletin

In hindsight, Dairy Australia’s Dairy Situation and Outlook – October 2015 report’s cautious tone in relation in the season’s opening milk price (of $5.60 per kg of milk solids) has proven all too justified; continued weakness in international milk prices “defied” volume growth in global milk production, and a so-called “supply-side adjustment” was needed (at some time) in order to restore balance to market fundamentals. For Australian dairy farmers, the report warned that milk processors were flagging the possibility of a “step down” in FY16 milk prices, yet national milk production would increase by 2% to around 10 billion litres.

Fast-forward seven months to May 2016 and the “supply-side adjustment” has arrived. Dairy Australia is now actively encouraging dairy farmers to take stock of their pasture, herd and financial situation given current uncertainty around seasonal conditions and milk pricing.

In this edition of the Agribusiness Bulletin, we take a closer look at the potential impact on Tasmania’s dairy industry and an overview of some of the financial assistance packages offered by milk processors.

Tasmanian dairies produced over nine percent of the nation’s milk. 2015-16 has been a challenging year for many dairy farmers in the state with exceptional dry and warmer conditions. Many farmers have experienced water restrictions and lack of feed1. With recent announcements in relation to milk prices, outlined below, it is likely that 2016-17 will be tougher again.

Approximately 18,901 square kilometres of land in Tasmania is classified as agricultural land, around 28%, most of this is in the north and east of the state. There are approximately 440 dairy farms in Tasmania directly employing 1,500 in the farm sector and 1,200 in the processing sector2. The value of agricultural income for the state in 2014-15 was $1.4 billion, of which nearly $450 million was generated from the dairy sector.

The cash income for Tasmanian dairy farms in 2014-2015 decreased from an average of $238,130 in 2013-2014 to $221,800. Although farmers saw an increase of 11% in average volume milk production, this increase was not sufficient to offset lower prices per litre received for milk and an increase in farm costs, particularly expenditure for feed.

ABARES projects that 2015-2016 farm cash income of the Tasmanian dairy industry will see a further decline to an average of $132,000 per farm. This decrease is around 50% on incomes just two years earlier and falling back below the 10 year average (to 2015-2016) income level. This reflects the effects of lower forecast milk prices and even further increases in feed costs as a result of drier seasonal conditions already experienced this calendar year3.

As can be seen from the above table it is anticipated that 17% of dairy farms in Tasmania (roughly 75 in number) will have negative cash income in 2015-2016.

Annual milk prices are driven by the prices offered by Murray Goulburn and Fonterra who collect the majority of milk within the state. These prices drive the price offered by a number of other regional processors of cheese, processed dairy products and fresh dairy products4.

Murray Goulburn:

On 26 April 2016 Murray Goulburn announced it would be reducing milk prices to suppliers from $5.605 per kg milk solids to $4.75 - $5.00 per kg of milk solids, a drop of around 10%, and back dated to 1 July 2015. Murray Goulburn has offered farmers a milk support payment to give suppliers an equivalent milk price of $5.47 per kg of milk solids. In their letter to suppliers dated 13 May 2016, Murray Goulburn outlined the terms of this support payment, in the form of an interest-free loan, as follows6:

Offer available to suppliers (southern milk pool only), up to the equivalent of $0.26 per kilogram of milk solids (based on supplier production standard)

Principal payments to commence from January 2017 and must be concluded by 31 December 2017 (and principal payments can be paid at a faster rate if a supplier wishes)

Standard interest rate (currently 6.9%) to apply on any remaining loan balance from July 2017 onwards

Offer available until 30 September 2016

Offer is for new loan applications only.

Fonterra:

On 5 May 2016 Fonterra announced it was also following suit and reducing its farm gate milk price by more than 10% to $5.00 per kg of milk solids, also backdated to 1 July 20157.

Fonterra have offered suppliers a low interest loan of 3.95% for 3 years to make up for the $0.60 per kg of milk solids reduction, with repayments commencing in 2018.

Suppliers have the option to supply milk in May and June with payment reduced by approximately 75%.The farmers with spring calvers have now received around 10 months of income at higher milk prices which cannot be revoked and those same farmers have a choice as to whether to milk in May and June. However, the autumn calvers recently commenced milking and therefore have less flexibility in their milking program.

A further announcement on 13 May 2016 sought to mitigate the particular impacts on autumn calving dairy farmers, with an additional $2.50 per kg of milk solids to be paid in July and August 2016 (for milk delivered in May and June 2016).

Lion:

On 10 May 2016 Lion Dairy & Drinks announced a reduction in their farm gate milk price to $4.65 per kg milk solids for the month of June 2016 only. This price change only affects suppliers who are on a variable pricing scheme, estimated to be less than 10% of suppliers in Victoria, Tasmania and South Australia.

Phil Beattie, spokesperson for the collective bargaining group for Tasmanian Lion suppliers, said all suppliers would be affected differently8.

We are here to help

Combined with the drought conditions in Tasmania the reduction in milk prices is a significant challenge for dairy farmers. Whether or not to accept the support payments on offer will be a decision for each dairy farm enterprise to make based on their circumstances and ability to access alternate funding sources through this period of reduced farm gate prices.

We welcome any queries that you may have in relation to this issue and can be contacted directly by anyone seeking assistance.

Contact Us

Partner, Financial advisory

Shelley is the Tasmanian Restructuring Services Partner, with over 14 years’ experience in corporate and personal insolvency, acting for mortgagees and business turnaround. Shelley has a broad range o... More

Director, Financial advisory

Jackie has nearly 15 years of practical experience in agribusiness and specialises in production systems across northern Australia. Jackie is the firm’s resident agronomist and has a particular intere... More

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